Make your child a millionaire. Give your child a £1m pension fund to spend on the best UK annuity rates when they reach their retirement annuity buying age. Children do cost a small fortune to run, so to speak, and the costs do seem to go on forever. Therefore, saving for a child’s retirement more than fifty to sixty years into the future is actually likely to be the last thing on the mind of a parent or even a grandparent, but it actually makes more financial sense than you might think.
Figures from pensions company Clerical Medical show that £300 saved each month for a young child by a parent or grandparent between birth and the age of only 16 could provide a massive pension pot of around £1.2 million by the time the child retires at the ripe old age of 55, without the child ever having put in a penny during their working life (annual growth of 6%). At current UK annuity rates, this would provide a retirement income of nearly £70,000 per year from the age of 55, or more than £80,000 per year from the age of 65.
Pension reforms back in 2001 introduced the stakeholder pension, and, interestingly, this type of pension allows people under the age of 75 to make income-related pension savings both flexibly and cheaply. The stakeholder plan also allows those with only a small income, or maybe no income at all, to pay up to £3,600 each year into a scheme without reference to their annual earnings. This has opened the way for higher earners to make regular payments into a pension plan on behalf of non-earning family members who since the reforms can, for the first time in history, benefit from pension fund savings in their own right.
A further benefit of these reforms is that these contributions are made net of tax, whether the pension account holder has taxable earnings or not. So, someone paying in the maximum £3,600 per year that is permitted without looking at earnings would actually hand over to the plan just £2,880, with the extra £720 being paid into the plan by the government. This means that fully funding a stakeholder pension plan for a child with no taxable income would cost a parent or grandparent only £240 a month.
Bob Fraser, an adviser at wealth manager Towry Law, says that contributions made during the first 18 years of a child’s life could easily end up being worth more than equivalent contributions paid during the 42 years from ages 18 to 60. Towry Law figures show that ongoing contributions of £3,600 per year between birth and the age of 18 and then ceased would create a pension fund at age 60 of £1.31m, while saving from the age of 18 to 60 would create a pension fund of less than half that at around £660,000, assuming a growth rate of 7%. And that’s a lot of money to spend on the then best UK pension annuity rates.
